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Distribution

Distribution, Egypt
Region: Egypt
Created: Jan 12, 2010, modified: Jan 12, 2012, overall rating: 1.000

THE DISTRIBUTION SECTOR provides the crucial link between producers and consumers, playing a key role in price formation and the efficient allocation of resources across the economy. A major contributor to GDP, it is also a prime generator of employment that has expanded significantly with Egypt's economic uptick since 2004—05.

Egypt's distribution sector is grouped into four categories: wholesale, retail, franchising and commission agents' servic­es. Wholesale includes businesses selling merchandise to re­tailers, industrial, commercial, institutional or other profes­sional business users, or to other wholesalers. Retailers are those selling goods for personal or household consumption. Franchisers sell specific rights and privileges such as the right to use a particular retail format or a trademark, while com­mission agents trade on behalf of others.

The services sector as a whole accounts for 54% of the na­tion's GDP and 58% of employment. Together, wholesale and retail trade account for 11.4% of GDP in FY 2006/07. Whole­sale and retail services are also the third-largest employer in the Egyptian economy after agriculture and manufacturing, accounting for 9% of total employment and 12.6% of private sector employment in FY 2006/07.

Greater consumer demand for service and quality in a pe­riod of intense economic growth, combined with the constant search for cost efficiency, is driving a trend towards more in­tegrated distribution chains and even the total bypassing of wholesalers to deal directly with manufacturers. The increas­ing uptake of information technology across the Egyptian economy is facilitating this, as large enterprises in particular improve their inventory, warehousing and logistics capabilities. At the same time, the modernization of production process­es (including the adoption of just-in-time distribution methods, single or dual sourcing policies, transnational sourcing and contract manufacturing) is encouraging increased cooperation between retail and wholesale. It also encourages wholesalers to increase the range of services they offer and moves them to­wards increased specialization in market focus.

To compete in this increasingly competitive industry, small companies are engaging in cooperative arrangements (buying groups, strategic alliances and franchise agreements). Fran­chising is of particular interest given that some key players in the retail sector have entered the Egyptian market via fran­chising. In addition to major global restaurant, clothing and electronics franchises (to name but a few), Egypt has also be­gun generating its own franchise brands.

 Retail Services

Retail services account for 59% of total businesses in Egypt ac­cording to the latest Census of Establishments in Egypt. Within the retail sub-sector. 99.7% of all establishments are microen-terprises, employing between one and four workers.

The approximately US$ 31 billion food, beverages and tobacco retail market in Egypt comprises the largest share in terms of the number of establishments and employees in the retail sub-sector. This group, however, remains largely fragmented with mass retailers accounting for 8.6% of the total market (by value) while traditional convenience grocery stores dominate the retail scene.

In the private sector, more than 1.1 million establishments are active in retail. Food and beverage retailers dominate the sub-sector, accounting for 50.9% of total establishments and 43.5% of employment among microenterprises. This is followed by textiles, garments and footwear enterprises, which make up 8.6% of total establishments and 9.6% of employment in the re­tail sub-sector.

Supermarkets and Hypermarkets

The late 1970s saw a small number of local supermarkets emerging in Cairo's large neighborhoods, followed by the in­troduction of hypermarkets in the 1980s, through foreign enter­prises. The hypermarket concept has been successfully adopted by local companies including Ragab Sons. Abu Zikri and El-Haw a ry, which operate at the middle to lower end of the mar­ket, specializing in retail sales at highly discounted prices.

French retail giant Carrefour began operations in 2003 and now has three massive outlets with a fourth under construction and plans for several more. One of the most recent entrants to Egypt's retail sector is the MiddleEast chain Spinney's, which opened its first 13,500-square-meter, US$ 10 million hypermar­ket outlet in CityStars in 2006.

The development of the supermarket / hypermarket sector in Egypt is exerting significant pressure on the small scale tradi­tional grocery stores. In affluent neighborhoods in particular, they are being increasingly transformed into convenience stores catering on an ad-hoc basis to consumers, rather than on the ba­sis of consistent large-scale household sales. In the less affluent and more densely populated districts of Cairo, traditional gro­cery stores have survived due to the fact that most supermar­kets have been almost exclusively catering to middle and higher income consumers.

Department Stores and Clothing

The concept of department stores is hardly new in Egypt. Be­fore the 1960s, Cairo and Alexandria boasted a large number of department stores — at that time on par with those in Europe. The decline of these department stores was matched by the ex­pansion of small scale clothing retail shops.

In 1986. the first shopping mall was opened as an annex to the Cairo Ramses Hilton, following which malls spread across Cairo. CityStars, the opening of which coincided with the lift­ing of the import ban on clothing, is one of the largest malls in the Middle East region and has added a new dimension to the standards and quality of retail shopping in Cairo.

Today, international brands including Nike, Mango, Esprit, Levi's, Benetton and Sisely have taken advantage of stream­lined customs regimes and procedures to add a new angle of competition in the clothing retail sub-sector in Egypt. The so­phistication of foreign owned retail outlets and the quality req­uisites imposed for products to be displayed is putting pressure on local retailers to improve the quality of their products.

Despite the competition, the market is far from saturated. Department stores are currently targeting a small percentage of the market — wealthy consumers -— who make up only 4.9% of the total population (approximately 3.55 million people). This small percentage, however, still remains significant in relative terms, since this 3.5 million is larger than the entire population of Dubai and almost as large as the population of Lebanon, the region's two largest retail hubs.

Wholesale

In what is termed the organized wholesale sub-sector. 2004 turnover stood at EGP 15.2 billion, focusing mainly on fuel and related products. In the unorganized private sub-sector, whole­sale turnover stood at EGP 7 billion, with an additional EGP 1.8 billion as sales on behalf of others.

As with retail, food and beverages activities dominate the wholesale sub-sector, making up 47% of establishments in the private sector and 34% of employment.

Franchising

Franchising has developed extensively in Egypt over a short pe­riod, particularly in the fast-food sector. The current food fran­chise market size is estimated at more than US$ 300 million. Popular chains include: Chili's, TGI Fridays, Hard Rock Cafe, KFC. Little Caesars Pizza, McDonald's, Pizza Hut and Baskin Robins. From seven chains in 1993, Egypt currently boasts 45 franchises — either operational or with imminent plans to open. Market sources project the franchising business to contin­ue growing at an annual rate of 10-20% over the coming years.

An example of franchising success is the Kuwait Food Company, the food-processing arm of the Al Kharafi Group, better known under the brand name Americana. The group owns the largest food company in the Middle East and in Egypt has invested US$ 700 million, in the food process­ing industry, the tourism sector (which includes the franchise business segment) and infrastructure projects. Americana is the market leader for franchise business in the Middle East and is the franchisee for KFC. Pizza Hut, Subway, Hardee's and TGI Fridays in Egypt.

During the 1990s, non-food franchises also began to experi­ence considerable development, particularly in the garment sec­tor. A limited number of companies in the fields of hotel man­agement (Marriott), car rental (Hertz), language education (Berlitze), health and fitness (Weight Watchers), electronics (Radio Shack) and computer training are also currently franchised in Egypt.

The presence of franchise business in Egypt has been exten­sively beneficial to both the fast-food and garment sectors. In the fast-food sector, where the bulk of ingredients are sourced locally, franchising has created strong backward linkages with the agricultural and the industrial sectors. The quality stan­dards imposed by the franchisee has also upgraded the stan­dards adhered to in the agricultural field as well as in the indus­trial sector.

Commercial Agents

According to the latest statistics available in Egypt, in 2003 there were 3,900 commercial agents representing 105,200 for­eign firms. Agencies generally base themselves geographical­ly, covering Alexandria with or without the Delta cities on one hand, and Cairo and the Nile valley on the other.

It is mandated by law that all commercial agents and import­ers have Egyptian nationality. Even though foreigners are not allowed to operate commercial agencies in Egypt, from a con­tractual view-point. Egyptian law concerning commercial agen­cy agreements is considered to be among the most liberal in the Middle East region.

Agent commission rates may vary according to the type of product or service as well as volume of sales. Usually the larger the volume of sales, the smaller the commission. For commod­ities such as rice, wheat, sugar, lumber or cotton, the commis­sion ranges between 1—3%. For chemicals and foodstuffs the commission is 3-5%, while for machinery and technical equip­ment it ranges between 10 and 15%.

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